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Kansas DOT's $200 Million Bond Sale Finances Road Work Program

DEC 4, 2012 5:37pm ET
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DALLAS – Thursday’s Kansas Department of Transportation competitive sale of $200 million of highway revenue bonds will fund the next year of projects in the department’s 10-year Transportation Works for Kansas program.

The comprehensive capital improvement plan approved by the Kansas Legislature in May 2010 authorizes KDOT to issue bonds totaling up to 18% of the annual revenues deposited into the highway fund.

KDOT originally planned to issue $1.5 billion of revenue bonds for the $6.4 billion highway portion of the effort, but the latest plans calls for more pay-as-you-go funding and $1.1 billion of new debt over the 10 years.

“We’ve seen project bids come in under what we had expected, and the department has also realized some operational savings,” said Kent Olson, director of fiscal and asset management at KDOT. 

Another $725 million of highway revenue bonds is expected to be issued over the next three fiscal years for capital projects in the transportation program, Olson said.

The bonds, as well as KDOT’s $1.54 billion of outstanding highway revenue bonds, are rated Aa1 with a negative outlook by Moody’s Investors Service, AA-plus with a stable outlook by Fitch Ratings, and AAA with a stable outlook by Standard & Poor’s.

Public Financial Management Inc. is financial advisor to KDOT. Bond counsel is Gilmore & Bell PC.

The T-WORKS improvement program focuses on maintaining the existing infrastructure of roads and bridges rather than new construction. The plan includes $4.2 billion of highway repairs and maintenance, and $1.8 billion for modernization and expansion.

The initial series of  bonds issued for the program was a $325 million tranche of taxable Build America Bonds issued in August 2010. The 2010 sale was the state’s first new-money issue for highway projects since 2004.

Proceeds from the sale of $154 million of highway revenue bonds in September were earmarked for advance refunding of $174 million from $250 million of outstanding fixed-rate bonds issued in 2004.

A negotiated sale in August of  $151.4 million of highway revenue bonds refunded $150.9 million of KDOT’s unhedged variable-rate debt issued in 2008.

The refunding bonds were issued as variable-rate SIFMA index notes with maturities of Sept. 1 in 2013, 2014, and 2015.

KDOT has reduced its exposure to variable-rate debt by raising the fixed-rate debt portion of its portfolio to 74%  of outstanding obligations from 38% over the past two years.

However, Moody’s analysts said KDOT’s outstanding swap and variable-rate debt portfolio “still ranks among the largest, in proportion to total debt, among rated highway revenue bond issuers.”

Six interest-rate swap agreements remain on $631 million of KDOT revenue bonds, including $406 million of variable-rate bonds and $151 million of SIFMA Index bonds. 

The latest mark-to-market valuation of the swaps was negative $69 million. KDOT has posted collateral of $28.8 million with Goldman Sachs Bank USA.

The revenue streams supporting KDOT’s bonds include an 0.4% slice from a temporary 1% increase in the state sales tax that went into effect in 2010.

The overall rate will go to 5.7% in July from the current 6.3%, but KDOT will retain the permanent 0.4% increase,

The dedicated sales tax generated $313 million for the highway fund in fiscal 2012, or about 25% of the total state funding. Sales tax revenue is expected to provide 34% of the collections deposited into state highway fund in fiscal 2014.

State motor fuel taxes of 24 cents per gallon for gasoline and 26 cents for diesel currently generate 37% of highway fund revenues, but that support is expected to drop to 28% by fiscal 2015 due to declining sales.

The 2012 Legislature directed KDOT to determine the “long-term feasibility of relying on the motor fuel tax as the primary mechanism of funding the state’s highway maintenance and construction program.”

A report is due at the end of 2013.

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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